Key performance measures

The key financial performance measures used by Reed Elsevier and the bases of their calculation are as follows:

• Revenue – as reported in the financial statements.
• Adjusted operating profit – reported operating profit before amortisation of acquired intangible assets and goodwill impairment, exceptional restructuring and acquisition related costs, and share of taxation of joint ventures.
• Adjusted operating margin – adjusted operating profit expressed as a percentage of revenue.
• Adjusted profit before tax – reported profit before tax before amortisation of acquired intangible assets and goodwill impairment, exceptional restructuring and acquisition related costs, share of taxation of joint ventures, disposals and other non operating items.
• Effective tax rate on adjusted profit before tax – reflects the tax rate excluding movements on deferred tax balances not expected to crystallise in the near term, more closely aligning with cash taxes payable, and includes the benefit of deductible tax amortisation on acquired goodwill and intangible assets.
• Adjusted profit after tax – reported profit after tax before amortisation of acquired intangible assets and goodwill impairment, exceptional restructuring and acquisition related costs, disposals and other non operating items, related tax effects and movements on deferred tax balances not expected to crystallise in the near term.
• Adjusted profit attributable to shareholders – reported profit attributable to shareholders before amortisation of acquired intangible assets and goodwill impairment, exceptional restructuring and acquisition related costs, disposals and other non operating items, related tax effects and movements on deferred tax balances not expected to crystallise in the near term.
• Adjusted earnings per share – adjusted profit attributable to shareholders of each parent company divided by the respective average number of ordinary shares in issue in the period.
• Adjusted operating cash flow – cash generated from operations plus dividends from joint ventures less net capital expenditure on property, plant and equipment and internally developed intangible assets, and excluding payments in relation to exceptional restructuring and acquisition related costs.
• Free cash flow – adjusted operating cash flow less net interest and taxes paid and excluding cash tax benefits of exceptional restructuring and acquisition related costs.
• Constant currency growth – growth rates calculated using the prior year average and hedge exchange rates.
• Underlying growth – constant currency growth rates excluding acquisitions and disposals.
• Total shareholder return (TSR) – the aggregate of share price growth over a specified period of time and the value of dividends paid during that time, assuming that such dividends are reinvested in the shares.
• Return on capital employed – adjusted operating profit less taxation (at the effective rate for the year) expressed as a percentage of average capital employed, being the aggregate of gross goodwill (adjusted to exclude the gross up to goodwill in respect of deferred tax liabilities on acquisitions) and acquired intangible assets, property, plant and equipment, internally developed intangible assets, working capital, net pension assets, less provisions.

The source data for calculating the key performance measures is obtained from the Reed Elsevier financial reporting system.

The adjusted figures are adopted as key performance measures since they measure performance without reference to non cash amortisation of intangible assets and impairment of goodwill, mostly acquired in prior periods, which has no operational relevance to current performance. Exceptional restructuring costs are excluded as they are typically one-off in nature and directed at improving the ongoing operational performance measured through the adjusted figures. Acquisition related expenses are excluded since they are a direct function of the relevant acquisition activity and not a reflection of ongoing operational performance. Underlying growth, excluding acquisitions and disposals, is measured to give a proper assessment of year-on-year organic growth without distortion for part year contributions. Constant currency growth is measured to give a better reflection of year-on-year performance before translation and other currency effects in arriving at the reported figures in the reporting currencies of the parent companies.

Performance in respect of the principal key performance measures for Reed Elsevier is described in the Chief Executive Officer’s Report and the Operating and Financial Review above.

The derivations of adjusted operating profit, adjusted profit before tax, adjusted profit attributable, and adjusted operating cash flow are disclosed in the notes to the combined financial statements. The derivation of the adjusted earnings per share of the parent companies is shown in the notes to the respective Reed Elsevier PLC and Reed Elsevier NV consolidated financial statements.